U.S. Markets closed

Edited Transcript of SSYS earnings conference call or presentation 1-Nov-18 12:30pm GMT

Q3 2018 Stratasys Ltd Earnings Call

EDEN PRAIRIE Nov 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Stratasys Ltd earnings conference call or presentation Thursday, November 1, 2018 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Reis

Stratasys Ltd. - Vice Chairman of the Board

* Elchanan Jaglom

Stratasys Ltd. - Chairman & Interim CEO

* Lilach Payorski

Stratasys Ltd. - CFO

* Yonah Lloyd

Stratasys Ltd. - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Ben Zion Rose

Battle Road Research Ltd. - Founder, President & Analyst

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* David Ryzhik

Susquehanna Financial Group, LLLP, Research Division - Associate

* Hendi Susanto

G. Research, LLC - Research Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

* Troy Donavon Jensen

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Q3 2018 Stratasys' Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to your host, Yonah Lloyd.

--------------------------------------------------------------------------------

Yonah Lloyd, Stratasys Ltd. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone, and thank you for joining us to discuss our third quarter financial results. On the call with us today are Elan Jaglom, Interim CEO; David Reis, Vice Chairman and the Head of our Board's Oversight Committee, joining by telephone; and Lilach Payorski, our CFO.

I remind you that access to today's call, including the prepared slide presentation, is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation, will also be available, and can be accessed through the Investor Relations section of our website.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes and other future financial performance, and our expectations for our business outlook. All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed in Stratasys' annual report on Form 20-F for the 2017 year, filed with the SEC on February 28, 2018, and in our report on Form 6-K, along with the related press release concerning our earnings for the third quarter of 2018, which we have furnished to the SEC today. Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

As in previous quarters, today's call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Certain non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and in today's press release.

Now I would like to turn the call over to our Interim CEO, Elan Jaglom. Elan?

--------------------------------------------------------------------------------

Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [3]

--------------------------------------------------------------------------------

Thank you, Yonah. Good morning everyone, and thank you for joining today's call. We are pleased with our third quarter results that showed a continued recovery in high-end systems orders which began the previous quarter, as well as improved results at Stratasys Direct Manufacturing and steady growth in the recurring consumable and consumer support revenues.

I will return later in the call to provide an update on our search for new chief executive officer, and David will provide more details regarding the highlights of the quarter and other key developments. But first, I will turn the call over to our CFO, Lilach Payorski, who will review the details of our financial results. Lilach?

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Elan, and good morning, everyone.

Total revenue in the third quarter was $162.0 million compared to $155.9 million for the same period last year, up 4.0%. After adjusting for the sale of our divested entities this quarter, on a like-for-like basis, total revenue was up 6.0%. GAAP operating income for the third quarter was $3.4 million compared to operating loss of $6.9 million for the same period last year.

Non-GAAP operating income for the third quarter was $8.2 million compared to operating income of $8.1 million for the same period last year.

Product revenue in the third quarter was $109.6 million, an increase of 1.1% compared to the same period last year and 3.8%, excluding the divested entities. Within product revenue, system revenue for the quarter was flat compared to the same period last year, but was up 3.3% after adjusting for the divested entities.

Consumable revenue increased by 2.6% compared to the same period last year, and up 4.3%, excluding the divested entities.

Services revenue in the third quarter was $52.4 million, an increase of 10.4% compared to the same period last year, driven by growth of customer support revenues and strong performance at Stratasys Direct Manufacturing. Within services revenue, customer support revenue, which includes revenue generated mainly by maintenance contracts on our systems, increased by 7.4% compared to the same period last year, driven primarily by growth in our installed base of systems and improvement in our service contract attach rate.

GAAP gross margin was 48.7% for the quarter compared to 48.3% for the same period last year. Non-GAAP gross margin was 52.1% for the third quarter compared to 52.5% for the same period last year, driven by the composition of our revenue sources.

Non-GAAP product gross margin increased to 60.6% compared to 59.6% for the same period last year, driven by product mix. Non-GAAP service gross margin was 34.5% compared to 36.3% for the same period last year, reflecting increased investments in our customer service and support operations.

GAAP operating expenses decreased by 8.0% to $75.6 million for the third quarter as compared to the same period last year, primarily due to the net gain from divestments. Non-GAAP operating expenses increased by 3.4% to $76.3 million for the third quarter as compared to the same period last year, reflecting our continued R&D investment in long-term initiatives, including advancement in our core FDM and PolyJet technologies, as well as our new metal additive manufacturing platform, advanced composite material, and software and application development.

The Company generated $5.0 million cash from operation during the third quarter as compared to $4.6 million of cash generated in the third quarter last year. We ended the third quarter with $348.9 million in cash and cash equivalents compared to $346.7 million at the end of the second quarter of 2018.

Inventory increased slightly to $118.1 million compared to $117.0 million in the second quarter of 2018. Accounts receivable increased to $129.5 million compared to $123.5 million as of the end of the second quarter of 2018, with days sales outstanding, or DSO, on 12-month trailing revenue at 71.

To recap, our revenue results are in line with expectations and reflect the continuation of a recovery in high-end system sales. We are pleased with the continued improvement at Stratasys Direct Manufacturing, which contributed to growth in overall service revenue. Our continued growth in the recurring revenue from consumable and customer support is encouraging and demonstrates the continued health of our installed base of systems.

We are pleased with our operating expense control, which resulted in a reduction in G&A, as we increase investment in long-term initiatives to support our technological leadership and expand our addressable markets. We continue our trend of positive cash generation from operating activity, and believe we maintain a healthy balance sheet and are well prepared to take advantage of opportunities moving forward.

I would now like to turn the call back over to Elan.

--------------------------------------------------------------------------------

Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [5]

--------------------------------------------------------------------------------

Thank you, Lilach. As we noted on the last call, the company's Board of Directors has established an Executive Search Committee composed of myself and Victor Leventhal, the Chairman of Compensation Committee, to help identify a new chief executive officer. Vic and I have been actively interviewing candidates, a few of whom have gone deeper into the process, and we have met or spoken with other members of our board. We are confident that the people on our short list are strong leaders, with relevant global operational experience, and we look forward to announcing a new CEO when we have completed the search.

I would like now to ask David to provide more detailed information regarding the results of the quarter. David?

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [6]

--------------------------------------------------------------------------------

Thank you, Elan. In the third quarter, we were pleased with our continued commitment we are observing from our customers, reflected in the strong sales of high-end production systems, as well as ongoing strength in recurring revenue from consumables and services, which is notable despite the decline in systems sales we experienced early in the year.

We are pleased with the increased level of customer commitment we continue to see as customer move beyond qualification and validation phase around an application, to expanding their capacity in true production environments. As an example, we spoke in the first quarter of last year about how Siemens Mobility was pioneering the use of Stratasys FDM 3D printing technology by producing customized final production parts for German transport service provider. In mid-September, Siemens Mobility announced it has opened its first digital rail maintenance center, the Siemens Mobility RRX Rail Service Center in Germany. The new maintenance depot expects to service over 100 trains every month, and offers the highest level of digitalization in the rail industry, with advanced FDM 3D printers from Stratasys at the heart of their service operation.

Inventory increased -- sorry. Additionally, in August, at the IMTS manufacturing exhibition, we showcased multiple customers in our booth and highlighted the unique application that they are addressing with our technology today, including: FedEx, who are developing efficiency in their supply chain as they work to deploy additive manufacturing facilities closer to customers as part of their FedEx Forward Depot service offering; SLS, an aerospace customer using our FDM technology for rapid response, customized, high-temperature lay-up tooling that previously would have been done with CNC; Lockheed Martin, leveraging our new Antero PEKK advanced thermoplastic to create highly repeatable parts that meet strict mechanical functions and dimensional requirements for space travel; and Penske's NASCAR division, showing multiple 3D printer end-use parts that their production managers can create in a single day, compared to multiple days using traditional machine methods.

Looking beyond manufacturing applications that our technology can address today, we are excited about our progress in developing new innovative solution across our FDM and PolyJet platform that we believe will expand our addressable markets in advanced manufacturing over the next years. We are pleased with the progress being made in the development of our new metal additive manufacturing platform for short run production and expect to have greater engagement with our development partners next year as we move through the stages towards commercialization.

We're encouraged with the improved performance at Stratasys Direct Manufacturing. SDM is benefiting for organizational change we made early in the year to bring it direct under North America sales organization and leverage the synergy between our parts and our hardware businesses, as well as strong growth in manufacturing orders led by metal part production, and an increase in larger, more complex projects and programs from our top customers, particularly aerospace.

Specifically, in the third quarter we were pleased to see several large customers significantly growing their order size as they increasingly relying on SDM for production parts and development needs. And as we have discussed in the past, the mix of SDM business has shift significantly towards more profitable additive manufactured parts over those made conventionally.

I would now like to turn the call over to our VP of Investor Relations, Yonah, who will provide greater details on our 2018 financial guidance. Yonah?

--------------------------------------------------------------------------------

Yonah Lloyd, Stratasys Ltd. - VP of IR [7]

--------------------------------------------------------------------------------

Thank you, David. We are updating our guidance for 2018 as follows: total revenue in the range of $670 to $680 million, compared to the previous guidance of $670 million to $700 million; GAAP net loss of $10 million to $2 million, or $0.19 to $0.04 per diluted share, compared to previous guidance of net loss of $41 million to $25 million, or $0.75 to $0.46 per diluted share; non-GAAP net income in the range of $27 million to $30 million, or $0.50 to $0.55 per diluted share, compared to previous guidance of net income of $16 million to $27 million, or $0.30 to $0.50 per diluted share. Non-GAAP operating margin is still expected to be in the range of 4.5% to 6%. Capital expenditures are projected to be $25 million to $35 million, compared the previous projection of $30 million to $40 million.

Our guidance reflects increased investments in R&D, tools, materials, and additional resources aimed at expanding our addressable markets by accelerating our development efforts for the new metal additive manufacturing platform, further advancements based on our FDM and PolyJet technologies, and specific go-to-market initiatives to deepen our customer engagement.

Non-GAAP earnings guidance excludes: $34 million of projected amortization of intangible assets; $16 million to $17 million of share-based compensation expense; net gains from divestitures of $23 million to $22 million; and reorganization-related expense of $6 million to $7 million; and includes between a negative $1 million in tax expenses to $1 million in tax income related to non-GAAP adjustments. The estimated non-GAAP tax rate for 2018 is impacted by the ongoing non-cash valuation allowance on deferred tax assets that we expect to record throughout the year on U.S. losses.

Given the expected ongoing negative impact of not recording a tax benefit on U.S. tax losses on our net income, as well as significant quarter-to-quarter variability in our non-GAAP tax rate, the company believes non-GAAP operating income is the best measure of our performance. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in a table at the end of our press release and slide presentation, with itemized detail concerning the non-GAAP financial measures.

Operator, you may now open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Troy Jensen from Piper.

--------------------------------------------------------------------------------

Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

--------------------------------------------------------------------------------

So quickly, maybe for David I guess, or Lilach. High-end systems were strong this quarter. Did you see that strength across all verticals? And I guess I'm trying to figure out when we really expect to see the aerospace protocols start to significantly inflect.

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [3]

--------------------------------------------------------------------------------

Okay. So we saw strength in the -- or for -- it was the second quarter in a row, mainly in what we call government was mainly military and aerospace. But I think if you look backwards let's say 4, 5 quarters, we see strength in all the manufacturing areas, including also aerospace and military.

--------------------------------------------------------------------------------

Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

--------------------------------------------------------------------------------

When do you expect to see a more meaningful acceleration in the aerospace business?

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [5]

--------------------------------------------------------------------------------

I think when we talked about it last quarter and also on the earlier, it takes time in the aerospace for customers to move from testing and validating to real production, and in certain companies with certain partners, we see this process starting gradually. And I think as customer will gain confidence, we're going to see acceleration of the use of especially FDM, [continuing] in end use parts in those segments, specifically in aerospace.

--------------------------------------------------------------------------------

Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. That's fair. How about another one for you, David. Could you just give us your thoughts on HP's color launch and whether or not that impacted PolyJet now or do you think it will in future quarters?

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [7]

--------------------------------------------------------------------------------

I think, as always, it did not impact the PolyJet, and I was very happy to hear that HP is following us, going into color. I think that color will become the standard of prototyping in the coming few years. And it's kind of a mindset change in the user base, and so I'm happy that other companies are going into this area. And I think that technology-wise, we are by far best-positioned to lead this change from point of view of the technology and quality. So I'm not concerned about it, and I'm happy that other competitors are going into this area.

--------------------------------------------------------------------------------

Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [8]

--------------------------------------------------------------------------------

Okay. If I could get one more question and I'll cede the floor, but can you just talk about materials? I think they're up 2.6%, maybe a little bit more when you factored out some divestitures. But is that -- and that's a growth rate that you think is sustainable, or is that kind of below historical trends?

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [9]

--------------------------------------------------------------------------------

Sorry, I think there are two parameters on the consumer consumption. One of them is a direct derivative of the number of printers we sold during the current quarter and last quarter. The other one has to do with the utilization, which is directly related to the number of applications which we are able to provide our installed base over time and improving workflows and so on, so forth. So I think that we're happy to see that the consumption goes up despite the fact that we had the slow Q1 in machine sales, and it's directly related. So if we would go back to growth or more substantial growth in hardware sales, you're going to see an increase in consumables. And we are doing progress not all across the board, but with many segments in improving the application and workflow side, which is resulting in increased consumption. To summarize, I think that our estimate is in the future, as we are going to continue recovering hardware sales and continue providing better workflows and application and knowledge to customers, we should see higher growth in the consumables.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from the line of Brian Drab from William Blair.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [11]

--------------------------------------------------------------------------------

I just wanted to ask first on operating expense. You laid this out nicely on Slide 10. The R&D seems to have stepped up materially sequentially by a few million and SG&A is down. Can you give us any help on what to expect in the fourth quarter of 2018 and into the quarters in 2019?

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [12]

--------------------------------------------------------------------------------

In terms of guidance of operating expenses, usually Q4 is our strongest quarter also from a revenue perspective. So I would expect to see operating expenses going up as a result as well. In terms of R&D expenses, it's going on with what we communicated earlier in the year in terms of our increasing our investment in our core technology and FDM technology and as well as in metal and additionally application. The spending on R&D is really based on project lifecycle and timing of the project, so not necessarily very specific seasonality in R&D. It's more about, like I mentioned, about the project lifecycle. So we would expect OpEx in Q4 to be higher due to seasonality of the revenue, as well as run rate on the R&D will continue to be probably a similar level.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [13]

--------------------------------------------------------------------------------

Okay, got it. And then could you give a little more of an update on some of the technologies that you're developing, specifically within Evolve and Vulcan, and just a summary of how that is progressing? And also maybe a reminder of your ownership structure there and how those technologies and their potential success could impact your results down the road.

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [14]

--------------------------------------------------------------------------------

We reported earlier this year that we divested out Evolve, so currently, those results are not -- they are not part of the operating income. We are basically taking our share in Evolve's results. And we are maintaining a minority interest in those entity, and the results will be basically below the line, and we will not pay -- at least expect to see a significant, say, result or impact on our financial significantly as a result of that.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [15]

--------------------------------------------------------------------------------

Okay. Just curious if you could comment on why, if those are such interesting technologies, why they would be structured that way. And it seems like it would have been great if by -- you could have benefited more from those exciting technologies. I'm just curious.

--------------------------------------------------------------------------------

Yonah Lloyd, Stratasys Ltd. - VP of IR [16]

--------------------------------------------------------------------------------

Brian -- oh, okay. Go ahead. I'm sorry, go ahead.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Your next question comes from the line of Wamsi Mohan from Bank of America.

--------------------------------------------------------------------------------

Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [18]

--------------------------------------------------------------------------------

Thanks for the update on the CEO search. Sounds like you're getting somewhat close. Is this something we should expect that you will announce this quarter? It's hard to sort of really underwrite the long-term strategic direction of the company until you announce a new CEO that either articulates or reiterates the strategy. So is this something that's fairly near term? And I have a follow-up, please.

--------------------------------------------------------------------------------

Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [19]

--------------------------------------------------------------------------------

Yes. We've been actively searching for a CEO, as we've been announcing. We interviewed some people, some very good candidates. It's not something that I can say short -- like because for that, I would have to have a contract and we don't have a contract. So we are very actively doing it, and we are looking for somebody who will be an outstanding leader with global operation experience, strong industrial background, and we have some very good candidates. So when we are ready to announce, we will do so. We said it'll take us maybe 9 months or so. We are within this range. And believe me; we want to do it as soon as we can, and as soon as we have some announcement, we'll let you guys know.

--------------------------------------------------------------------------------

Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [20]

--------------------------------------------------------------------------------

Okay. And as a follow-up, can you talk a little bit if you think the proposed China tariffs are having any impact on your business or what you're hearing from your customers as potential impact? I also was wondering if you could give us some clarity of whether a foreign exchange movement has created any impact on your results in this quarter and what you're anticipating for the fourth quarter as well.

--------------------------------------------------------------------------------

Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [21]

--------------------------------------------------------------------------------

Okay. So Lilach can handle it, so go ahead Lilach.

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [22]

--------------------------------------------------------------------------------

Yes, thank you. Good morning. We definitely watch close and carefully all the changes that are coming through the U.S. tariffs change and who was imposed and changes. And currently, specifically to our business, we do not see a significant impact from a cost perspective, but there are probably going to be some, but it's not going to be so significant. And we are addressing alternatives or any other alternative from a cost perspective to address it. What was the other --

--------------------------------------------------------------------------------

Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [23]

--------------------------------------------------------------------------------

FX.

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [24]

--------------------------------------------------------------------------------

FX. The FX question, in this quarter we did not -- the FX didn't impact us so significantly. There was no so significant fluctuation on the euro. It's minor impact. About, say, $500,000 on the revenue.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Your next question comes from the line of Ananda Baruah from Loop Capital.

--------------------------------------------------------------------------------

Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [26]

--------------------------------------------------------------------------------

Could you just, for us, summarize or go through what you'd like us to think of as being the 2019 drivers of the business, and what will be the things that you guys will be focusing on? And if you can give us some sense of how those might layer through the year, that would be helpful as well. And then I have a quick follow up.

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [27]

--------------------------------------------------------------------------------

Okay, I'll take it -- David -- good morning. We believe, and you saw it in Q3, that we have the potential to go back to reasonable growth rates. And we are going to focus on 2 areas. One of them is in our sale infrastructure and sales operations. I think globally we can do better. The other two to improve our top line, both on the sales side and the marketing. On the back of it, and as you saw with our R&D budget, we are spending significant amount of money to develop a great product in all the areas that we are active; the manufacturing side with our FDM line, with the best rapid prototyping systems based on PolyJet technology and MakerBot. Next year in 2020, going to be about -- launches of very interesting product improve in the overall operation as far as sales and marketing globally, and which we hope will result in return to even improved top line growth compared to what you see in Q3.

--------------------------------------------------------------------------------

Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [28]

--------------------------------------------------------------------------------

David, that's very helpful. I appreciate it. And then just quick follow up. Can you just remind us, from a metals perspective, how you view what your differentiation will be, even if it's at a higher level at this point kind of relative to what's been out there, and now HP is divulging a little more information as well. We'd just love to get your thoughts on Stratasys' differentiation.

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [29]

--------------------------------------------------------------------------------

Again, I cannot spend too much about it, but we are developing a unique technology, which we believe, but has to be proven the coming quarters and years that is very suitable for re-manufacturing of metal parts. It's different than the other technologies. I think it will be a more suitable to production, less expensive. And as we said in the script, we are in the process of engaging with the few, the substantial partners around the world to together to develop and finally define the exact ways the system is going to operate. But we are relatively gone through the process, and when we are ready, we are going to announce and give more information.

--------------------------------------------------------------------------------

Yonah Lloyd, Stratasys Ltd. - VP of IR [30]

--------------------------------------------------------------------------------

Ananda, if you want to -- at the Formnext exhibition in 2 weeks in Frankfurt, we'll have some representatives there from the metal team, and we'll be providing a little bit more detail there. So if you or anyone else of course on the call can make it there, you'll get certainly more information.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Your next question comes from the line of Shannon Cross with Cross Research.

--------------------------------------------------------------------------------

Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [32]

--------------------------------------------------------------------------------

I'm curious about within SDM, your attach rates for services and I assume warranty and maintenance in that. And maybe you can talk about what you've been doing to increase that and then how big this opportunity could be over time.

--------------------------------------------------------------------------------

Yonah Lloyd, Stratasys Ltd. - VP of IR [33]

--------------------------------------------------------------------------------

Shannon, did you ask about SDM or FDM?

--------------------------------------------------------------------------------

Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [34]

--------------------------------------------------------------------------------

Sorry. I ask about your -- the services business; not FDM, no. So basically what you can -- I saw from your transcripts and some of that, your prepared remarks, that you were starting to increase the amount of attach you had of maintenance and other services with your products, I believe, which is helping to drive some of the services revenue. Is that correct?

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [35]

--------------------------------------------------------------------------------

Yes. So, yes. We see a continuous increase in the growth in services revenue, contract maintenance and the time and material maintenance as a result of increasing of attach rate of our customer to buy those renewal maintenance, as well as an interest in our installed base. So this is basically, we actually experienced this for more than couple of quarters in whole. So it validates that our customers are using the machine and needs our additional added value to bring, together with the maintenance, that it bring value to customers. They choose to actually renew contract, and they continue get involved with us with Stratasys and are happy with our services.

--------------------------------------------------------------------------------

Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [36]

--------------------------------------------------------------------------------

And I guess what I'm trying to figure out is within your installed base, is this an opportunity to go in and sell additional services into your installed base so that there'll be incremental growth above and beyond what you're seeing just from a product -- attach with new product sales? Or is this not something where we can expect that you're going to be able to sign incremental services and contracts with people currently in your installed base?

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [37]

--------------------------------------------------------------------------------

[Crosstalk]. Go ahead, David.

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [38]

--------------------------------------------------------------------------------

Again, we need to remember obviously that a major part of our business is providing consumables to our customers. So the fact that we are able to show our customers that full-service contracts are good for them, usually resulting in a higher level of satisfaction which is a derivative of uptime of the machine, which translates to higher consumables sold. It's all connected together. So there's a big effort to sell full-service contracts, because we know from past experience that customers which are full-service or full-service contracts are typically A) happier, B) their uptime is higher, and therefore they're using more consumables. So the effort is a cross-company effort, which results both on revenue on the service side of it, but indirectly impacts also consumable sales.

--------------------------------------------------------------------------------

Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [39]

--------------------------------------------------------------------------------

Okay. And then David, can you talk a little bit -- I think over sort of 2018, at least the feeling I got from our conversations with your company is that it was sort of a pause year for the industry in that there's a lot of technologies being developed, obviously metal was growing. Not something you were necessarily directly benefiting from. And so I guess just in terms of your conversations with customers and your position, do you think we're getting to the point where 2019 is more of a benefit from all the investments made in 2018, and frankly in 2017 as well? Or do you think the industry is just, it's sort of slow and steady, so there's not necessarily an inflection we should look for?

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [40]

--------------------------------------------------------------------------------

Just to let you know, I don't view the notion that the industry is slowing. I think that some companies, including ourselves and few other major players, find ourselves in a different environment in which there's, at least on paper, much more competition. Which is, by the way, not direct competition. It's more mindshare and in some cases pocket share indirect competition. I think that -- and I hope in the coming 1 or 2 years, the picture will crystalize also in the eyes of our customers, and that the result of it, they will be able to take decision faster. Because one of the things that we saw, we talked about it in previous calls, is there is a slowdown in the pace in which customers take decision to buy equipment because at least it seems that the offering is growing instead. It's a little bit confusing. So I think this pathway should kind of get clearer in the coming 1 or 2 years, and I think there's a chance that the situation overall will improve because at least in Stratasys, we are working on and investing a lot of money in developing new and improved technologies. So I think this combination, again, you're asking me what will happen beginning 2019, end 2019, beginning 2020, end of 2020. I think in the short and medium term, I would hope and expect to see improvements.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Your next comes from the line of Hendi Susanto from Gabelli.

--------------------------------------------------------------------------------

Hendi Susanto, G. Research, LLC - Research Analyst [42]

--------------------------------------------------------------------------------

One question. Would you be able to share some puts and takes on your main reasons why you take down the top end of your full-year revenue guidance?

--------------------------------------------------------------------------------

Lilach Payorski, Stratasys Ltd. - CFO [43]

--------------------------------------------------------------------------------

And now after we already concluded 3 quarters into the year and we have a visibility for the remaining of the year, we believe that adjusting the guidance in middle of the range to $670 million to $680 million, it definitely provide a better visibility to you in terms of what's going to -- how it going to look, the fourth quarter will look like. We believe this range is achievable. I remind you that the fourth quarter is traditionally our highest quarter from a seasonality perspective, and we believe that we will be able to meet those narrow guidance. One thing to note is that we will likely be leaning closer to the 670, but feel we are keeping the 670 to 680 range.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Your next question comes from the line of David Ryzhik with Susquehanna Financial Group.

--------------------------------------------------------------------------------

David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [45]

--------------------------------------------------------------------------------

Would love to dig deeper into the SDM parts strength. I think it grew 12% year over year. Maybe in your discussions with customers, are the increased parts orders a function of them testing your systems which could lead to hardware sales, or would you consider them kind of independent, standalone parts business? And have they given you visibility over the next few quarters? Do you think this kind of strength is sustainable? And I have a follow-up.

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [46]

--------------------------------------------------------------------------------

Maybe I'll answer the first part first. We said in the script that a few quarters ago, we basically connected the SDM with our North America operation. And one of the reasons that what we had done so is to try and create synergies between the two sales infrastructure. Obviously, and we said also on the call, there is a growth in the SDM of production on the digital side compared to convention. Some of the digital, using of course Stratasys equipment and products, and I believe it will have the impact on the also customer decisions to buy those equipment when the volume or for different reasons they want to do it in-house. As for projections going forward, I think we should expect to benefit from the synergies between the two organizations, and hopefully will result with continuous growth.

--------------------------------------------------------------------------------

David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [47]

--------------------------------------------------------------------------------

Great. And would love to get an update on F123 and MakerBot. Specifically F123, on F123 side, just would love any color there. And on MakerBot, it sounds like you guys have some new product introductions on the way. David, would love to get your thoughts on the market, on desktop opportunity, how you view it, and what we can expect from MakerBot over the next -- over the coming year.

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [48]

--------------------------------------------------------------------------------

So first of all, MakerBot is performing in line or even better than what we expected the different elements. Obviously I cannot disclose information about new products, but we have also a substantial R&D operation going with the MakerBot. With respect to the overall market, I think that also this market will go through some rationalization over the coming quarters. And I expect MakerBot -- which is today, by the way, a major player there -- to continue major player in this market.

--------------------------------------------------------------------------------

Yonah Lloyd, Stratasys Ltd. - VP of IR [49]

--------------------------------------------------------------------------------

And David, with regard to your question on the F123, we also have some exciting innovations and plans for that scheduled for next year, so you'll have to stay tuned on that one.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Your next question comes from the line of Ben Rose from Battle Road Research.

--------------------------------------------------------------------------------

Ben Zion Rose, Battle Road Research Ltd. - Founder, President & Analyst [51]

--------------------------------------------------------------------------------

Question for you, David. Referencing what you said earlier in terms of the market being -- there's more competition in the market, yet there's opportunity for growth. You spoke last quarter about HP and how Stratasys wants to take the fight more directly to HP. I'm wondering if now that the Jet Fusion has been in the market for some time after HP tried to freeze the market before its delivery, are you now seeing customers more clear on what your value proposition is relative to HP?

--------------------------------------------------------------------------------

David Reis, Stratasys Ltd. - Vice Chairman of the Board [52]

--------------------------------------------------------------------------------

Yes, I think -- again, as I said earlier, I think that there was in the past few years we saw a lot of new competition entering the market. And initially, and even still today, there's some confusion about the different benefits of the different products for a very large variety of the industries and applications. I think customers are gradually learning what is good for what. And again, I think that we're lucky. We're in a growing market, in a market that will become a very large market I hope in the coming few years. And I don't -- again, I said many times -- the issue is not the direct competition. The issue is FDM, for example, is a great technology for the manufacturing space. There's a lot of areas in manufacturing that probably FDM is the best technology around with almost no competition. Nevertheless, now that players are coming into the market, the customers are hesitating. They have to learn, they have to test. And I think that we are in that process of each one of those technologies becoming clear to the audience and people who know where to place which technology. And because I think the overall market will grow and will continue to grow, I think that direct competition will be less significant.

--------------------------------------------------------------------------------

Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [53]

--------------------------------------------------------------------------------

Okay. Thank you all for joining today's call. We look forward to seeing those of you who will be attending the annual Formnext exhibition in Frankfurt later this month, and be happy to be speaking to you all early next year. Thank you.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.